Debt Funding For Startups: Why Indian Startups Are Choosing Debt Funding
Debt funding for startups is among the most searched topics on google. It has been gaining traction in India as a reliable source of capital for businesses of all sizes. Whether you’re a startup, small-to-medium enterprise (SME), or an established corporation, debt funding offers numerous benefits over traditional forms of financing.
From lower interest rates to greater flexibility, debt funding is fast becoming a popular choice for businesses seeking to grow and expand.
In this blog, we’ll dive into the world of debt funding in India, exploring its benefits, why it’s becoming more popular among startups, and why it’s a better option for businesses looking to secure capital. So, if you’re considering debt funding as a way to grow your business, keep reading to learn more!
Debt Funding For Startups Simplified
Debt funding is a type of financing that allows startups to borrow money with the obligation to repay the principal amount plus interest. In India, venture debt funding has become a popular choice for startups as it offers several benefits over equity funding.
This article will discuss why venture debt funding is a better option for startups in India, its benefits, and the platforms that provide debt funding to startups in the country.
Rise of Venture Debt Funding in India
Venture debt has been quickly gaining popularity among a diverse range of industries, including Fintech, consumer products, B2B, and agritech. These industries have recognized the value of venture debt in meeting their working capital, balance sheet, capex, and inventory holding needs.
Exciting new sectors such as SaaS, IoT, and electric mobility are also poised to benefit greatly from venture debt as they grow and scale. SaaS companies, with their predictable revenue model, are particularly well suited for venture debt, while EV and IoT companies can use it to finance their capital expenditures.
In 2021, startups in India raised about Rs 4,500 Cr of venture debt, more than twice the amount raised in the year before. Last year till December, the value of venture debt reached $400 million, a rise of nearly 14% over compared to 2021, data from private market tracker Venture Intelligence showed.
As venture debt continues to mature, it is being customized and tailored to meet the specific needs of companies from different sectors and stages, with debt repayment requirements aligned with underlying cash flows.
Why Debt Funding is the Better Option for Indian Businesses
Debt funding has become a preferred source of capital for Indian businesses due to its numerous advantages. Unlike equity funding, debt funding does not require giving up ownership or control of the company. This means that businesses can continue to operate as usual and make decisions independently, without having to answer to outside investors.
Additionally, debt funding typically comes with lower interest rates and more flexible repayment terms compared to other forms of financing, making it a more cost-effective option for businesses.
Furthermore, debt funding does not dilute the value of the company, allowing businesses to retain their equity and build long-term wealth. With its low risk and a high potential for growth, it’s no wonder that debt funding is quickly becoming the better option for Indian businesses seeking capital to grow and expand.
Top 5 Reasons Why Venture Debt Funding Is Better For Startups
- Retain control: Debt funding does not require startups to give up any ownership or control over their company. This allows founders and executives to make decisions without considering the interests of external investors.
- Predictable repayment: Debt funding comes with a defined repayment schedule, allowing startups to plan their finances and operations accordingly. This can help startups better manage their cash flow and avoid any surprises.
- Tax benefits: In India, the interest paid on debt funding is tax-deductible, which can result in significant tax savings for startups.
- No equity dilution: Debt funding does not dilute the equity of a startup, ensuring that the founder retains full ownership of the company.
- Flexible repayment options: Debt funding can be structured to meet the cash flow and repayment needs of startups, providing them with flexible repayment options.
Benefits of Debt Financing for Indian Startups and SMEs
- Access to capital: Debt funding provides startups with access to capital, which can be used to fund growth and expansion initiatives.
- Improved financial stability: By taking on debt, startups can strengthen their financial stability and reduce the impact of unexpected events such as economic downturns.
- Increased credibility: Demonstrating a willingness to repay debt can increase the credibility of startups, making them more attractive to potential investors.
- Improved cash flow management: With a predictable source of cash flow from debt funding, startups can better manage their finances and ensure their continued success.
Platforms Providing Debt Funding In India
- Banks: Banks are a traditional source of debt funding for businesses in India, offering a range of loan products specifically designed for startups.
- Non-Banking Financial Companies (NBFCs): NBFCs are financial institutions that offer loan services to businesses, including startups. They can provide alternative sources of debt funding with more flexible repayment terms compared to banks.
- Online lending platforms: Online lending platforms have emerged as a popular source of debt funding for startups in India, offering quick and convenient loan services. These platforms use advanced technology to assess the creditworthiness of startups and provide funding in a matter of days.
List Of A few Indian Startups That Raised Debt Funding In 2022:
- Aye Finance, an MSME lending platform, raised a debt round of Rs 75 crore from leading global impact investment manager Triple Jump B and Northern Arc.
- Tech-driven aquaculture-focused startup Aquaconnect raised Rs 60 crore in venture debt round of funding led by Trifecta Capital.
- Emeritus, a Mumbai-based edtech unicorn, raised $350 million in debt financing from Canada Pension Plan Investment Board (CPP Investments) through its subsidiary CPPIB Credit Investments Inc.
- Toothsi, a Mumbai-based at-home smile makeover brand, raised $9 million (Rs 66.6 crore) in a debt funding round led by Stride ventures.
In 2023, Sugmya Finance, an NBFC catering to women-led communities in rural and semi-urban India, raised Rs 100 crore in debt funding. LoanTap, a lendingtech startup, raised INR 24 Cr ($2.9 Mn) in a debt funding round led by Singapore-based global investment platform Lighthouse Canton.
- Repayment obligations: With debt funding, businesses must repay the loan and interest on time, which can be a challenge for some businesses during difficult economic conditions.
- Increased debt burden: By taking on debt, businesses increase their debt burden and may face challenges in obtaining additional funding in the future.
- Credit risk: Debt funding is a credit-based instrument, meaning that businesses must have a strong credit rating to secure funding. Those with weaker credit ratings may face challenges in obtaining debt funding.
- Interest rate fluctuations: Changes in interest rates can impact the cost of debt funding and the ability of businesses to repay their loans.
Despite these challenges, debt funding remains a popular and effective source of capital for Indian businesses, offering numerous benefits and opportunities for growth and success.
In conclusion, debt funding is a valuable source of financing for startups in India, offering numerous benefits over equity funding. From retaining control over the company to improved financial stability and increased credibility, debt funding can help startups succeed and reach their full potential. It is important for startups to carefully evaluate their financial needs and choose the debt funding platform that best suits their requirements.
Contact us, if you require assistance in debt funding for your startup.
Note: If you are a budding entrepreneur and require assistance to register a Pvt Ltd Company, register a company, create financial projections, business development, LLP Registration, compliance filing, funding formalities, CFO Services, or other startup related legal services, contact us.